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Define bonds? Explain how bonds are priced. Be sure to provide an example of a bond.

Define bonds? Explain how bonds are priced. Be sure to provide an example of a bond.

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Answer #1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Bond is a fixed income security. It typically pays a Interest amount at regular intervals & Principal amount at last.

It can be broadly of 2 types: Government or

Corporate.

The price of bond = present value of all future cash flows discounted at yield to maturity.

Example:

A bond has face value of 1000,

Matures in 4 years.

Coupon rate = 7%

Yield to maturity = 9%

Price =

[70/(1.09)^1]+[70/(1.09)^2]+[70/(1.09)^3]+[1070/(1.09)^4]

= 935.21

Therefore, price of the bond is equal to $ 935.21

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